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Answer:
Dear
BuyandHolder,
Good
question.
On
May 28th, President Bush signed into law a $350 billion
tax cut package. Many of the tax cuts expire in 2004
and 2008. Among the provisions that might affect you
as an investor: lower tax rates on both dividends
and capital gains.
About
capital gains...
The
maximum tax on capital gains from the sale of stock
falls from 20% to 15%. And for those who were paying
10%, the rate falls to just 5%.
These
new rates are effective for sale of stocks on or after
May 6, 2003.
Then,
in 2008, for that one year only, the 5% rate drops
to zero.
The
next year, in 2009, both rates go back to where they
were before: 20% and 10%.
About
dividends...
Dividend
income will be taxed at a maximum rate of 15%, down
from rates that were as high as 38.6%. However, if
you fall into the bottom two tax brackets (15% and
lower), your dividends will be taxed at a rate of
only 5%.
(Before
the new tax cut, dividends were taxed at ordinary
income tax rates.)
These
new rates on dividend income are retroactive to January
1, 2003.
Then,
come 2008, the 5% rate drops to zero, but for one
year only.
The
next year, in 2009, both rates go back to where they
were -- taxed at ordinary income rates.
The
impact on stock sales...
The
capital gains tax will affect you only if you decide
to sell a stock -- and if you sell at a profit --
after May 6. If you sold an appreciated asset before
May 6, it will be taxed at the old 20% rate.
The
new law also eliminates the five-year holding period
required to get the lower capital gains rate.
Short-term
gains -- those on appreciated assets owned less than
a year -- are still taxed at ordinary income rates.
The
impact on dividends...
The
tax on dividends will obviously affect you if you
own dividend-paying stock.
There
is one exception, however and that is real estate
investment trusts (REITs). These companies do not
pay corporate taxes, so most dividends will continue
to be taxed as ordinary income, at a maximum of 35%.
This
being the IRS, however, even this rule has exceptions
-- there are some REITs in which the lower 15% rate
will apply. So, if you own REITs, you should consult
your tax preparer. Or, read the information posted
by the National Association of Real Estate Investment
Trusts at: www.nareit.com.
(Click on "Recent News.")
More
Information...
Two
online sources for full details about the new tax
cuts:
www.irs.gov
www.wwwebtax.com.
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